National SemiConductor
Notes
NSM
November 4, 2002 11:30 AM
A look at Foveon
We have not printed much research on NSM. It is our understanding that NSM owns 40 % of Foveon. We asked NSM about the fundamentals and financials of Foveon and they would not disclose that information. Interestingly enough, we searched and found that a Public company named Synaptics (SYNA) also owns a portion of Foveon. The following are the Foveon mentions in Synaptics 10K for fiscal 2001.
We attended NSM’s analyst conference last month, but we are really not ready to disclose our research.
” Equity Losses. During Fiscal 2000, we recorded equity losses of $2,712,000, representing our share of losses incurred by Foveon. The total amount of the equity losses recognized were determined on the basis of our ownership interest in Foveon’s convertible preferred shares and our proportionate share of new funds provided to Foveon in exchange for convertible promissory notes and have been limited to the maximum of our total investment. Accordingly, the carrying value of our investment in Foveon has been reduced to zero at the end of fiscal 2000. ”
” During fiscal 2000, net cash used in operating activities was $40,000, reflecting our net loss of $2.0 million, offset by the combination of the following items: (1) adjustments for non-cash charges, including our proportionate share of equity losses in an affiliated company, Foveon, which totaled $2.7 million, a write-off of $855,000 of in-process research and development, $1.2 million of amortization and depreciation, and $137,000 of stock based compensation; and (2) increases in accounts receivable, inventories, and accounts payable of $3.7 million, $1.5 million, and $2.5 million, respectively, relating to our increased business activities. ”
” Investing activities typically relate to purchases of government-backed securities and investment-grade fixed income instruments and capital assets, which totaled $20.9 million for the year ended June 30, 2002. Investing activities for years ended June 30, 2000 and 2001, typically related purchases of capital assets, which totaled $982,000 and $1.1 million, respectively. In addition, we advanced $2.7 million in fiscal 2000 in the form of convertible promissory notes to Foveon, an affiliated company, and invested $1.5 million in cash in the October 1999 acquisition of ASL, which together with the capital assets purchases referred to above resulted in total cash used in investing activities of $5.3 million in fiscal 2000. We also issued 652,025 shares of our common stock in connection with the acquisition of ASL. In connection with the May 1999 acquisition of the sales representative workforce of our former outside sales agent in Taiwan, we issued 37,500 shares of our common stock and were obligated to issue an additional 37,500 shares if certain covenants were fulfilled. In fiscal 2001, we issued the remaining 37,500 shares upon fulfillment of those covenants. ”
” The long-term note payable to National Semiconductor represents limited-recourse debt that is secured solely by a portion of our preferred stockholdings in Foveon, Inc., in which National Semiconductor is also an investor. We do not anticipate making any payments under the limited-recourse loan with National Semiconductor, either prior to or at maturity, unless Foveon is participating in a liquidity event, such as an initial public offering of its equity securities or a merger, through which we would be able to receive amounts in excess of our $1.5 million long-term note payable plus accrued interest expense. ”
” We did not audit the financial statements of Foveon, Inc., which statements reflect net losses of $13,807,000 for the year ended July 1, 2000. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the losses from the affiliated company under the equity method and other data included for Foveon, Inc., is based solely on the report of the other auditors. ”
” During the year ended June 30, 1998, we entered into agreements with National Semiconductor Corporation (“National”), a related party, with respect to the formation of a development stage company, Foveonics, Inc. (now known as Foveon, Inc.), which was formed to develop and produce digital imaging products. We contributed technology for which we had no accounting basis for a 30% interest in Foveon in the form of voting convertible preferred stock. Under the agreements, we had the right to acquire additional shares of convertible preferred stock at a specified price in exchange for a limited-recourse loan from National. National loaned us $1,500,000 under a limited-recourse note, which we utilized to purchase additional preferred shares of Foveon, which increased our ownership interest in Foveon to 43%. The note matures in 2007 and bears interest at 6.0% per annum. If the note and related accrued interest are not repaid, National’s sole remedy under the loan is to require us to return to National a portion of Foveon shares purchased with the proceeds of the loan and held by us.
During the year ended June 30, 1998, we recorded our share of losses incurred by Foveon under the equity accounting method on the basis of our proportionate ownership of voting convertible preferred stock and reduced the carrying value of this equity investment to nil as our share of losses incurred by Foveon exceeded the carrying value of the investment. No equity losses were recorded during the year ended June 30, 1999 as we did not have any carrying value associated with the investment.
During the year ended June 30, 2000, we advanced to Foveon a total of $2,712,000 in return for convertible promissory notes. The notes were convertible into shares of Foveon preferred stock in accordance with the defined terms, had a term of ten years, and bore interest at rates ranging from 6.5% to 6.85%, payable at maturity. During the year ended June 30, 2000, we recorded our share of losses incurred by Foveon on the basis of our proportionate share of funding provided to Foveon by us and National and accordingly recorded additional equity losses limited to the then maximum carrying value of our total investment, which was $2,712,000, including the ownership of convertible debt securities issued by Foveon. Accordingly, as of June 30, 2000, 2001, and 2002, the carrying value of our investment in Foveon had been reduced to nil as our share of losses incurred by Foveon exceeded the carrying value of the investment. We are not obligated to provide additional funding to Foveon.
In August 2000, the convertible promissory notes we held and related accrued interest were automatically converted into 443,965 shares of Foveon preferred stock in connection with an equity financing completed by Foveon.
In connection with the issuance of the convertible promissory notes, we also received warrants to purchase 106,718 shares of Foveon Series B preferred stock and warrants to purchase 22,918 shares of Foveon Series C preferred stock at exercise prices of $5.88 and $6.76 per share, respectively. The preferred shares are convertible into common shares upon a firm underwritten public offering of Foveon common stock for proceeds of at least $20 million and a pre-offering market capitalization of at least $225 million. The voting rights of preferred stock were restricted as to the election of board of directors and certain protective provisions with respect to the sale of Foveon or substantially all the assets of Foveon. The preferred stockholders also have the right of first refusal in connection with the purchase of new securities to be offered by Foveon. ”
”
The following is a summary of Foveon’s financial information as of and for the years ended June 30, 2000, 2001, and 2002 (in thousands):
| June 30, | |||
|---|---|---|---|
| 2000 | 2001 | 2002 | |
| Current assets | $ 10,132 | $ 36,545 | |
| Total assets | 11,074 | 38,209 | |
| Current liabilities | 1,769 | 1,473 | |
| Total liabilities | 1,769 | 2,014 | |
| Net loss | $ (13,807 ) | (13,606 ) | (14,093 ) |
FOVEON, INC.
(A Development Stage Enterprise)
Balance Sheets
June 30, 2002 and 2001
| 2002 | 2001 | |
| Assets | (Unaudited) | (Unaudited) |
|---|---|---|
| Current assets: | ||
| Cash and cash equivalents | $ 36,289,363 | 9,765,055 |
| Accounts receivable | 41,577 | 72,965 |
| Inventories | 8,124 | 51,899 |
| Prepaid expenses | 192,836 | 94,511 |
| Other current assets | 13,064 | 147,635 |
| Total current assets | 36,544,964 | 10,132,065 |
| Property and equipment, net | 1,663,661 | 941,454 |
| Total assets | $ 38,208,625 | 11,073,519 |
| Liabilities, Convertible Preferred Stock and Shareholders’ Deficit | ||
| Current liabilities: | ||
| Accounts payable | $ 497,284 | 725,627 |
| Accrued liabilities | 632,179 | 630,706 |
| Current portion of capital lease obligations | 281,038 | 255,599 |
| Deferred revenue | 62,717 | 156,727 |
| Total current liabilities | 1,473,218 | 1,768,659 |
| Capital lease obligations, excluding current portion | 541,205 | – |
| Total liabilities | 2,014,423 | 1,768,659 |
| Commitments | ||
| Convertible preferred stock: | ||
| Series A, $0.001 par value; 6,300,000 shares authorized, issued, and outstanding (aggregate liquidation preference of $6,890,625) | 6,890,625 | 6,890,625 |
| Series B, $0.001 par value; 2,855,401 shares authorized; 2,580,000 shares issued and outstanding (aggregate liquidation preference of $15,176,463) | 14,160,708 | 14,160,708 |
| Series C, $0.001 par value; 4,097,704 shares authorized; 3,979,418 shares issued and outstanding (aggregate liquidation preference of $26,913,675) | 26,391,732 | 26,391,732 |
| Series D, $0.001 par value; 6,750,000 shares authorized; 5,249,677 shares issued and outstanding as of June 30, 2002 (aggregate liquidation preference of $40,999,977) | 40,885,407 | – |
| Shareholders’ deficit: | ||
| Common stock, $0.001 par value; 40,000,000 shares authorized; 1,516,092 and 1,337,797 shares issued and outstanding as of June 30, 2002 and 2001, respectively | 1,516 | 1,338 |
| Additional paid-in capital | 2,092,055 | 1,995,094 |
| Shareholder receivable | (675 ) | (675 ) |
| Deficit accumulated during the development stage | (54,227,166 ) | (40,133,962 ) |
| Total shareholders’ deficit | (52,134,270 ) | (38,138,205 ) |
| Total liabilities and shareholders’ deficit | $ 38,208,625 | 11,073,519 |
See accompanying notes to financial statements.
F-29
FOVEON, INC.
(A Development Stage Enterprise)
Statements of Operations
| June 30, 2002 | Years ended June 30, 2001 |
July 1, 2000 | Period from July 9, 1997 (inception) to June 30, 2002 |
|
|---|---|---|---|---|
| Net revenue | $ 589,119 (Unaudited) |
1,275,512 (Unaudited) |
311,043 | 2,175,674 (Unaudited) |
| Costs and expenses: | ||||
| Cost of revenue | 51,899 | 1,679,914 | 720,726 | 2,452,539 |
| Research and development | 9,892,207 | 7,206,279 | 5,834,902 | 31,453,303 |
| General and administrative | 2,330,567 | 2,034,711 | 1,815,413 | 8,275,622 |
| Sales and marketing | 2,673,416 | 4,367,109 | 4,993,297 | 14,264,791 |
| Total costs and expenses | 14,948,089 | 15,288,013 | 13,364,338 | 56,446,255 |
| Operating loss | (14,358,970 ) | (14,012,501 ) | (13,053,295 ) | (54,270,581 ) |
| Interest expense | (22,323 ) | (263,022 ) | (850,046 ) | (1,549,839 ) |
| Interest income | 288,089 | 669,821 | 96,806 | 1,593,254 |
| Net loss | $ (14,093,204 ) | (13,605,702 ) | (13,806,535 ) | (54,227,166 ) |
See accompanying notes to financial statements.
F-30
FOVEON, INC.
(A Development Stage Enterprise)
STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ DEFICIT
Period from July 9, 1997 (inception) to June 30, 2002
(Unaudited, except for the year ended July 1, 2000)
| Convertible preferred stock | ||||||||
| Series A | Series B | Series C | Series D | |||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | |
| Issuance of Series A preferred stock in exchange for intellectual property rights in August 1997 | 1,728,571 | $1,890,625 | — | $ | — | $ | — | $ |
| Issuance of Series A preferred stock for cash in August 1997 | 4,571,429 | 5,000,000 | – | – | – | – | – | – |
| Issuance of warrant to purchase Series B preferred stock in August 1997 | – | – | – | – | – | – | – | – |
| Issuance of restricted common stock in August 1997 | – | – | – | – | – | – | – | – |
| Issuance of restricted common stock in March 1998 | – | – | – | – | – | – | – | – |
| Issuance of restricted common stock in July 1998 | – | – | – | – | – | – | – | – |
| Net loss | – | – | – | – | – | – | – | – |
| Balances as of July 3, 1998 | 6,300,000 | 6,890,625 | – | – | – | – | – | – |
| Issuance of restricted common stock in July 1998 | – | – | – | – | – | – | – | – |
| Issuance of Series B preferred stock from exercise of warrant in August 1998 | — | – | 514,047 | 3,023,804 | – | – | – | – |
| Exercise of common stock options in September 1998 | – | – | – | – | – | – | – | – |
| Issuance of restricted common stock in January 1999 | – | – | – | – | – | – | – | – |
| Issuance of restricted common stock in June 1999 | — | — | — | — | — | — | — | — |
| Net loss | — | — | — | — | — | — | — | — |
| Balances as of July 2, 1999 | 6,300,000 | 6,890,625 | 514,047 | 3,023,804 | — | — | — | — |
| Repurchase of restricted common stock in October 1999 | — | — | — | — | — | — | — | — |
| Issuance of warrants in November 1999 in connection with notes payable | — | — | — | — | — | — | — | — |
| Issuance of warrants in December 1999 in connection with notes payable | — | — | — | — | — | — | — | — |
| Exercise of common stock options in January 2000 | — | — | — | — | — | — | — | — |
| Exercise of common stock options in March 2000 | — | — | — | — | — | — | — | — |
| Issuance of common stock in March 2000 | — | — | — | — | — | — | — | — |
| Issuance of Series B preferred stock for cash in March 2000 — | — | — | 30,000 | 176,471 | — | — | — | — |
| Issuance of warrants in March 2000 in connection with notes payable | — | — | — | — | — | — | — | — |
| Exercise of common stock options in April 2000 | — | — | — | — | — | — | — | — |
| Issuance of common stock in April 2000 | — | — | — | — | — | — | — | — |
| Common stock repurchase in May 2000 | — | — | — | — | — | — | — | — |
| Issuance of warrants in May 2000 in connection with notes payable | — | — | — | — | — | — | — | — |
| Exercise of common stock options in June 2000 | — | — | — | — | — | — | — | — |
| Stock-based compensation | — | — | — | — | — | — | — | — |
| Net loss | — | — | — | — | — | — | — | — |
| Balances as of July 1, 2000 | 6,300,000 | 6,890,625 | 544,047 | 3,200,275 | — | — | — | — |
| Exercise of common stock options in July 2000 | — | — | — | — | — | — | — | — |
| Issuance of Series C preferred stock for cash in August 2000 | — | — | — | — | 2,809,321 | 19,000,002 | — | — |
| Issuance of Series B preferred stock upon exercise of a warrant in August 2000 | — | — | 1,185,953 | 6,976,191 | — | — | — | — |
| Issuance of Series B preferred stock upon conversion of notes in August 2000 | — | — | 850,000 | 3,984,242 | — | — | — | — |
| Issuance of Series C preferred stock upon conversion of notes in August 2000 | — | — | — | — | 887,143 | 5,478,050 | — | — |
| Exercise of common stock options in September 2000 | — | — | — | — | — | — | — | — |
| Repurchase of restricted common stock in September 2000 | — | — | — | — | — | — | — | — |
| Exercise of common stock options in October 2000 | — | — | — | — | — | — | — | — |
| Exercise of common stock options in November 2000 | — | — | — | — | — | — | — | — |
| Exercise of common stock options in December 2000 | — | — | — | — | — | — | — | — |
| Issuance of Series C preferred stock for cash in December 2000 | — | — | — | — | 282,954 | 1,913,680 | — | — |
| Exercise of common stock options in January 2001 | — | — | — | — | — | — | — | — |
| Repurchase of restricted common stock in March 2001 | — | — | — | — | — | — | — | — |
| Exercise of common stock options in April 2001 | — | — | — | — | — | — | — | — |
| Issuance of restricted common stock in June 2001 | — | — | — | — | — | — | — | — |
| Net loss | — | — | — | — | — | — | — | — |
| Balances as of June 30, 2001 | 6,300,000 | 6,890,625 | 2,580,000 | 14,160,708 | 3,979,418 | 26,391,732 | — | — |
| Exercise of common stock options in July 2001 | — | — | — | — | — | — | — | — |
| Exercise of common stock options in September 2001 | — | — | — | — | — | — | — | — |
| Exercise of common stock options in November 2001 | — | — | — | — | — | — | — | — |
| Exercise of common stock options in January 2002 | — | — | — | — | — | — | — | — |
| Issuance of restricted common stock in March 2002 | — | — | — | — | — | — | — | — |
| Exercise of common stock options in March 2002 | — | — | — | — | — | — | — | — |
| Exercise of common stock options in April 2002 | — | — | — | — | — | — | — | — |
| Issuance of Series D preferred stock for cash in April 2002 | — | — | — | — | — | — | — | — |
| Net loss | — | — | — | — | — | — | — | — |
| Balances as of June 30, 2002 | 6,300,000 | $6,890,625 | 2,580,000 | $14,160,708 | 3,979,418 | $26,391,732 | 5,249,677 | $40,885,407 |
[Additional columns below]
[Continued from above table, first column(s) repeated]
| Common stock Shares |
Amount | Additional paid-in capital |
Shareholder receivable |
deficit accumulated during the development stage |
Total shareholders’ deficit |
|
| Issuance of Series A preferred stock in exchange for intellectual property rights in August 1997 | — | $ | — | — | — | — |
| Issuance of Series A preferred stock for cash in August 1997 | — | — | — | — | — | — |
| Issuance of warrant to purchase Series B preferred stock in August 1997 | — | — | 1,700 | — | — | 1,700 |
| Issuance of restricted common stock in August 1997 | 350,000 | 350 | 34,650 | — | — | 35,000 |
| Issuance of restricted common stock in March 1998 | 370,000 | 370 | 36,630 | — | — | 37,000 |
| Issuance of restricted common stock in July 1998 | 200,000 | 200 | 19,800 | — | — | 20,000 |
| Net loss | — | — | — | — | (4,794,435) | (4,794,435) |
| Balances as of July 3, 1998 | 920,000 | 920 | 92,780 | — | (4,794,435) | (4,700,735) |
| Issuance of restricted common stock in July 1998 | 85,000 | 85 | 8,415 | — | — | 8,500 |
| Issuance of Series B preferred stock from exercise of warrant in August 1998 | — | — | — | — | — | — |
| Exercise of common stock options in September 1998 | 6,250 | 6 | 619 | — | — | 625 |
| Issuance of restricted common stock in January 1999 | 10,000 | 10 | 4,990 | — | — | 5,000 |
| Issuance of restricted common stock in June 1999 | 150,000 | 150 | 74,850 | — | — | 75,000 |
| Net loss | — | — | — | — | (7,927,290) | (7,927,290) |
| Balances as of July 2, 1999 | 1,171,250 | 1,171 | 181,654 | — | (12,721,725) | (12,538,900) |
| Repurchase of restricted common stock in October 1999 | (35,000) | (35) | (3,465) | — | — | (3,500) |
| Issuance of warrants in November 1999 in connection with notes payable | — | — | 327,215 | 82 | — | 327,133 |
| Issuance of warrants in December 1999 in connection with notes payable | — | — | 779,274 | (193) | — | 779,081 |
| Exercise of common stock options in January 2000 | 14,063 | 14 | 1,392 | — | — | 1,406 |
| Exercise of common stock options in March 2000 | 1,562 | 2 | 779 | — | — | 781 |
| Issuance of common stock in March 2000 | 30,000 | 30 | 14,970 | — | — | 15,000 |
| Issuance of Series B preferred stock for cash in March 2000 | — | — | — | — | — | — |
| Issuance of warrants in March 2000 in connection with notes payable | — | — | 273,714 | (200) | — | 273,514 |
| Exercise of common stock options in April 2000 | 2,916 | 3 | 1,455 | — | — | 1,458 |
| Issuance of common stock in April 2000 | 5,000 | 5 | 2,495 | — | — | 2,500 |
| Common stock repurchase in May 2000 | (6,667) | (7) | (660) | — | — | (667) |
| Issuance of warrants in May 2000 in connection with notes payable | — | — | 273,714 | (200) | — | 273,514 |
| Exercise of common stock options in June 2000 | 7,083 | 7 | 3,535 | — | — | 3,542 |
| Stock-based compensation | — | — | 3,000 | — | — | 3,000 |
| Net loss | — | — | — | — | (13,806,535) | (13,806,535) |
| Balances as of July 1, 2000 | 1,190,207 | 1,190 | 1,859,072 | (675) | (26,528,260) | (24,668,673) |
| Exercise of common stock options in July 2000 | 25,000 | 25 | 12,475 | — | — | 12,500 |
| Issuance of Series C preferred stock for cash in August 2000 | — | — | — | — | — | — |
| Issuance of Series B preferred stock upon exercise of a warrant in August 2000 | — | — | — | — | — | — |
| Issuance of Series B preferred stock upon conversion of notes in August 2000 | — | — | — | — | — | — |
| Issuance of Series C preferred stock upon conversion of notes in August 2000 | — | — | — | — | — | — |
| Exercise of common stock options in September 2000 | 8,375 | 8 | 4,180 | — | — | 4,188 |
| Repurchase of restricted common stock in September 2000 | (13,542) | (13) | (1,341) | — | — | (1,354) |
| Exercise of common stock options in October 2000 | 312 | — | 156 | — | — | 156 |
| Exercise of common stock options in November 2000 | 25,000 | 25 | 12,475 | — | — | 12,500 |
| Exercise of common stock options in December 2000 | 9,457 | 10 | 4,718 | — | — | 4,728 |
| Issuance of Series C preferred stock for cash in December 2000 | — | — | — | — | — | — |
| Exercise of common stock options in January 2001 | 1,385 | 1 | 691 | — | — | 692 |
| Repurchase of restricted common stock in March 2001 | (67,397) | (67) | (6,673) | — | — | (6,740) |
| Exercise of common stock options in April 2001 | 9,000 | 9 | 4,491 | — | — | 4,500 |
| Issuance of restricted common stock in June 2001 | 150,000 | 150 | 104,850 | — | — | 105,000 |
| Net loss | — | — | — | — | (13,605,702) | (13,605,702) |
| Balances as of June 30, 2001 | 1,337,797 | 1,338 | 1,995,094 | (675) | (40,133,962) | (38,138,205) |
| Exercise of common stock options in July 2001 | 7,291 | 7 | 3,639 | — | — | 3,646 |
| Exercise of common stock options in September 2001 | 5,833 | 6 | 2,910 | — | — | 2,916 |
| Exercise of common stock options in November 2001 | 8,895 | 9 | 4,613 | — | — | 4,622 |
| Exercise of common stock options in January 2002 | 30,009 | 30 | 19,141 | — | — | 19,171 |
| Issuance of restricted common stock in March 2002 | 40,000 | 40 | 27,960 | — | — | 28,000 |
| Exercise of common stock options in March 2002 | 70,726 | 71 | 30,834 | — | — | 30,905 |
| Exercise of common stock options in April 2002 | 15,541 | 15 | 7,864 | — | — | 7,879 |
| Issuance of Series D preferred stock for cash in April 2002 | — | — | — | — | — | — |
| Net loss | — | — | — | — | (14,093,204) | (14,093,204) |
| Balances as of June 30, 2002 | 1,516,092 | $ 1,516 | 2,092,055 | (675) | (54,227,166) | (52,134,270) |
See accompanying notes to financial statements.
F-31
FOVEON, INC.
(A Development Stage Enterprise)
Statements of Cash Flows
| June 30, 2002 (Unaudited) |
Years ended June 30, 2001 (Unaudited) |
July 1, 2000 (Unaudited) |
Period from July 9, 1997 (inception) to June 30, 2002 |
|
| Cash flows from operating activities: | ||||
| Net loss | $ (14,093,204) | (13,605,702) | (13,806,535) | (54,227,166) |
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||
| Depreciation and amortization | 529,556 | 561,113 | 522,517 | 1,931,248 |
| Interest accrued and amortization of discount on notes payable | — | 36,882 | 771,549 | 1,209,562 |
| Loss on disposal of equipment | 5,211 | 127,255 | 20,731 | 157,179 |
| Stock-based compensation | — | — | 3,000 | 3,000 |
| Impairment of intellectual property rights | — | — | — | 1,890,625 |
| Charge for obsolete inventory | — | 1,005,462 | — | 1,005,462 |
| Changes in operating assets and liabilities: | ||||
| Accounts receivable | 31,388 | (72,965) | — | (41,577) |
| Inventories | 43,775 | (232,325) | (444,731) | (1,013,586) |
| Prepaid expenses, other current assets, and other assets | 36,246 | 12,968 | (89,729) | (205,900) |
| Accounts payable and accrued liabilities | (226,870) | 34,013 | 703,593 | 1,129,463 |
| Deferred revenue | (94,010) | (92,546) | 249,273 | 62,717 |
| Net cash used in operating activities | (13,767,908) | (12,225,845) | (12,070,332) | (48,098,973) |
| Cash flows used in investing activities: | ||||
| Purchases of property and equipment | (360,511) | (580,257) | (423,114) | (2,080,941) |
| Cash flows from financing activities: | ||||
| Proceeds from issuance of common stock | 97,139 | 144,264 | 24,687 | 447,215 |
| Repurchase of common stock | — | (8,094) | (4,167) | (12,261) |
| Proceeds from issuance of long-term notes payable | — | — | 9,000,000 | 15,976,191 |
| Proceeds from issuance of bridge loan | — | 1,000,000 | — | 1,000,000 |
| Proceeds from issuance of preferred stock and warrants, net of issuance costs | 40,885,407 | 20,913,682 | 176,471 | 70,001,064 |
| Repayments of notes payable and capital lease obligations | (329,819) | (331,001) | (207,855) | (942,932) |
| Net cash provided by financing activities | 40,652,727 | 21,718,851 | 8,989,136 | 86,469,277 |
| Net increase (decrease) in cash and cash equivalents | 26,524,308 | 8,912,749 | (3,504,310) | 36,289,363 |
| Cash and cash equivalents at beginning of year/period | 9,765,055 | 852,306 | 4,356,616 | — |
| Cash and cash equivalents at end of year/period | $ 36,289,363 | 9,765,055 | 852,306 | 36,289,363 |
| Supplemental disclosures of cash flow information: | ||||
| Cash paid during the year/period for interest | $ 22,323 | 1,320,169 | 78,497 | 1,434,306 |
| Noncash investing and financing activities: | ||||
| Issuance of preferred stock for intellectual property rights | — | — | — | 1,890,625 |
| Debt discount recorded for issuance of preferred stock warrants | — | — | 1,653,243 | 1,653,243 |
| Shareholders’ receivables recorded on issuance of warrants | — | — | 675 | 675 |
| Property and equipment acquired through capital leases | 896,463 | — | — | 1,671,147 |
| Conversion of notes to preferred stock | — | 9,462,292 | — | 9,462,292 |
| Cancelation of long-term notes payable as consideration for the exercise of a warrant to purchase preferred stock | — | 6,976,191 | — | 6,976,191 |
See accompanying notes to financial statements.
F-32
FOVEON, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
June 30, 2002 and 2001 and July 1, 2000
(All information as of and for the periods ended
June 30, 2002 and 2001 is unaudited)
(1) Description of Business
Foveon, Inc. (the Company) was incorporated in California on July 9, 1997 and reported its financial results for fiscal years ending on the first Friday in July through its fiscal year ended July 1, 2000. During fiscal 2001, the Company changed its fiscal year-end to June 30th. The Company’s business consisted of developing and manufacturing digital camera systems. In late fiscal 2001, the Company changed its development focus from producing digital camera systems to marketing the imagers and imaging subsystems to customers. In fiscal 2002, the Company continued to make a limited number of sales of digital camera systems, primarily to existing customers. Years ending in June or July of a particular year are referred to herein as fiscal years (for example, the year ended June 30, 2002 is referred to as fiscal 2002). As of June 30, 2002, the Company is in the development stage with primary activities to date including customer demonstrations and limited sales, raising capital, performing research and development activities, producing prototypes, developing strategic alliances, and identifying markets. Revenue related to its planned principal operations of selling imagers and imaging subsystems have not yet commenced
(2) Summary of Significant Accounting Policies
(a) Revenue Recognition
To date, revenue has been derived from sale of digital camera systems. Contracts from the sale of digital camera systems are multiple element arrangements with a combination of camera hardware, computer hardware and software, and software support services. As a result, revenue is recognized in accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, Software Revenue Recognition , and SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Arrangements.
SOP 97-2 generally requires revenue earned on arrangements involving software products and services to be allocated to each element based on the relative fair values of the elements. The fair value of the elements must be based on vendor-specific objective evidence of the fair values of the elements. Revenue for each element is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is probable.
Due to the early stage of the product, the sale of digital camera systems in fiscal 2000 involved installation and demonstration obligations performed by the Company subsequent to the delivery of the systems to the customer. After customer acceptance of the delivered hardware and software products has been received, the only remaining obligation to the customer was post-contract customer support.
Vendor-specific objective evidence of the fair value of the individual elements of the Company’s fiscal 2000 sales arrangements does not exist. Since essentially all the costs of the arrangement were incurred upon delivery of the hardware and software products, the costs of sales related to those items were recorded upon the later of payment or acceptance by the customer, and an equal amount of revenue was recognized at that time. The entire gross margin was deferred and is being recognized ratably over the term of the support arrangement (one to three years).
During fiscal 2001, the Company developed sufficient experience in marketing its systems such that the installation and demonstration obligations became incidental and collectibility is assured upon shipment. In addition, the Company discontinued offering substantial post-contract customer support. As a result, the Company began recognizing all revenue upon shipment during fiscal 2001.
F-33
FOVEON, INC.
(A Development Stage Enterprise)
Notes to Financial Statements — (Continued)
June 30, 2002 and 2001 and July 1, 2000
(All information as of and for the periods ended
June 30, 2002 and 2001 is unaudited)
(b) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
(c) Cash and Cash Equivalents
The Company considers all highly liquid investments with remaining maturities at the date of purchase of 90 days or less to be cash equivalents. As of June 30, 2002 and 2001, cash equivalents consisted of money market funds in the amounts of $36,222,725 and $9,713,092, respectively.
(d) Inventories
Inventories are stated at the lower of weighted-average cost or market.
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally three years. Leasehold improvements are amortized straight line over the shorter of the lease term or estimated useful life of the asset. Amortization of assets recorded under capital lease agreements is computed using the straight-line method over the shorter of the lease term or the estimated useful lives of the related assets.
(f) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded against deferred tax assets if it is more likely than not that all or a portion of the deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(g) Concentrations of Credit Risk
Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintained 100% and 99% as of June 30, 2002 and 2001, respectively, of its cash and cash equivalents with one financial institution. Management believes the financial risks associated with these financial instruments are minimal.
(h) Research and Development Costs
Development costs incurred in the research and development of new software products are expensed as incurred until technological feasibility in the form of a working model has been established. Under this policy, no software development costs have been capitalized to date.
(i) Stock-Based Compensation
The Company accounts for its stock-based employee compensation plans using the intrinsic-value method. Deferred stock-based compensation expense is recorded if, on the date of grant, the fair value
F-34
FOVEON, INC.
(A Development Stage Enterprise)
Notes to Financial Statements — (Continued)
June 30, 2002 and 2001 and July 1, 2000
(All information as of and for the periods ended
June 30, 2002 and 2001 is unaudited)
of the underlying stock exceeds the exercise price. Options granted to nonemployees are accounted for at fair value pursuant to Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation and EITF Issue No. 96-18 , Accounting for Equity Instruments Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services . The Company discloses the pro forma effect of using the fair-value method of accounting for all stock-based compensation arrangements in accordance with SFAS No. 123.
(j) Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
(k) Comprehensive Income
To date, the Company has not experienced any material elements of other comprehensive income. As a result, net loss is equal to comprehensive loss for all periods presented.
(l) Advertising Costs
The Company expenses advertising costs as incurred. These amounts are included in sales and marketing expenses in the accompanying financial statements. Advertising expense was $-0-, $86,607, $60,801, and $170,759 for the years ended June 30, 2002 and 2001, July 1, 2000, and the period from July 9, 1997 (inception) to June 30, 2002, respectively.
(m) Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets . SFAS No. 141 provides guidance on the accounting for a business combination at the date a business combination is completed. The statement requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001, thereby eliminating use of the pooling-of-interests method. The Company adopted SFAS No. 141 on July 1, 2001. The adoption did not have an effect on the financial statements. SFAS No. 142 provides guidance on how to account for goodwill and intangible assets after an acquisition is completed. The most substantive change is that goodwill will no longer be amortized but instead will be tested for impairment periodically. The Company adopted SFAS No. 142 as of the beginning of fiscal 2002 and the effect of adoption did not have an effect on the financial statements.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, Accounting for Asset Retirement Obligations . SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company is currently analyzing this statement and has not yet determined its impact on the financial statements. This Statement will be effective for fiscal 2003.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , which replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of . Although SFAS No. 144 retains the basic requirements of SFAS No. 121 regarding when and how to measure an impairment loss, it provides additional implementation guidance. SFAS No. 144 also supersedes the
F-35
FOVEON, INC.
(A Development Stage Enterprise)
Notes to Financial Statements — (Continued)
June 30, 2002 and 2001 and July 1, 2000
(All information as of and for the periods ended
June 30, 2002 and 2001 is unaudited)
provisions of APB Opinion No. 30, Reporting Results of Operations , pertaining to discontinued operations. Separate reporting of a discontinued operation is still required, but SFAS No. 144 expands the presentation to include a component of an entity, rather than strictly a business segment. The Company is currently analyzing this statement and has not yet determined its impact on the financial statements. This statement will be effective for fiscal 2003.
In April 2002, the Financial Accounting Standard Board issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, 64, Amendment of FASB No. 13, and Technical Corrections ’. Among other provisions, SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt ’. Accordingly, gains or losses from extinguishment of debt shall not be reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the criteria of APB No. 30. Gains or losses from extinguishment of debt that do not meet the criteria of APB No. 30 should be reclassified to income from continuing operations in all prior periods presented. This statement will be effective for fiscal 2003. The Company does not expect the adoption of SFAS 145 to have a material impact on its financial position or results of operations.
In June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities . This Statement requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management’s commitment to an exit plan, which is generally before an actual liability has been incurred. The requirements of this Statement are effective prospectively for exit or disposal activities initiated after December 31, 2002; however, early application of the Statement is encouraged. The Company’s adoption of Statement 146 will not have a material impact on its financial position or results of operations.
(3) Inventories
Inventories as of June 30, 2002 and 2001 consisted of the following:
| 2002 | 2001 | |
| Raw materials | $ 8,124 | — |
| Finished goods | — | 51,899 |
| $ 8,124 | 51,899 |
Near the end of fiscal 2001, the Company changed its business model from selling digital camera systems to marketing the imagers and imaging subsystems. As a result, the Company recorded a charge for inventory obsolescence totaling $1,005,462 to cost of revenue during the year ended June 30, 2001. During fiscal 2002, the Company made a limited number of sales of digital camera systems and recovered $83,716 of the inventory obsolescence loss recorded in fiscal 2001.
F-36
FOVEON, INC.
(A Development Stage Enterprise)
Notes to Financial Statements — (Continued)
June 30, 2002 and 2001 and July 1, 2000
(All information as of and for the periods ended
June 30, 2002 and 2001 is unaudited)
(4) Property and Equipment
Property and equipment as of June 30, 2002 and 2001 consisted of the following:
| 2002 | 2001 | |
| Computer and other equipment | $ 1,109,911 | 928,003 |
| Manufacturing and research and development equipment | 469,023 | 334,371 |
| Purchased software | 845,623 | 107,340 |
| Office furniture and equipment | 711,751 | 298,266 |
| Leasehold improvements | 37,316 | 17,332 |
| Construction in process | 40,632 | 385,890 |
| 3,214,256 | 2,071,202 | |
| Less accumulated depreciation and amortization | 1,550,595 | 1,129,748 |
| $ 1,663,661 | 941,454 |
(5) Accrued Liabilities
Accrued liabilities as of June 30, 2002 and 2001 consisted of the following:
| 2002 | 2001 | |
| Accrued compensation and benefits | $ 299,583 | 206,528 |
| Payroll and other taxes payable | 5,018 | 75,073 |
| Other | 327,578 | 349,105 |
| $ 632,179 | 630,706 |
(6) Convertible Preferred Stock and Shareholders’ Deficit
(a) Convertible Preferred Stock
Rights, preferences, and privileges of the holders of Series A, B, C, and D preferred stock are as follows:
• Dividends – The holders of the Series A, B, C, and D preferred stock are entitled to receive noncumulative dividends at the rate of $0.11, $0.59, $0.54, and $0.78 per share per annum, respectively. Dividends are payable when and if declared by the board of directors in preference and priority to any payment of dividends to holders of common stock.
• Liquidation Preference – In the event of any liquidation or winding up of the Company, the holders of the Series A, B, C, and D preferred stock are entitled to receive a liquidation preference of $1.09375, $5.88235, $6.763219, and $7.81 per share, respectively, plus all declared but unpaid dividends over holders of common stock. After payment has been made to the holders of all preferred stock of the full preferential amounts to which they shall be entitled, the remaining assets of the Company available for distribution to shareholders shall be distributed among the holders of Series A, B, C, and D preferred stock and the common stock pro rata based on the number of shares of common stock held by each assuming conversion of all Series A, B, C, and D preferred shares until the holders of Series A, B, C, and D preferred stock have received an aggregate of $3.28125, $17.64705, $20.289, $23.43 per share, respectively. A change in control of the Company is considered to be a liquidation event that entitles the holders of preferred stock to receive their liquidation preference from any proceeds.
F-37
FOVEON, INC.
(A Development Stage Enterprise)
Notes to Financial Statements – (Continued)
June 30, 2002 and 2001 and July 1, 2000
(All information as of and for the periods ended
June 30, 2002 and 2001 is unaudited)
• Conversion – The holders of the Series A, B, C, and D preferred stock have the right to convert the Series A, B, C, and D preferred stock, at any time, into shares of common stock. The initial conversion rate shall be 1:1 subject to adjustment for common stock dividends, combinations or splits and certain subsequent issuances of common or preferred stock for consideration per share less than $7.81.
• Automatic Conversion – The Series A, B, C, and D preferred stock shall be automatically converted into common stock at the then effective conversion price (i) in the event that the holders of at least 66-2/3% of the outstanding Series A, B, C, and D preferred stock, voting together as a class, consent to such conversion; or (ii) upon the closing of an underwritten public offering of shares of common stock of the Company at an aggregate offering price of not less than $20,000,000 and an aggregate pre-offering market capitalization of at least $225,000,000.
• Voting Rights – The holders of Series A, B, C, and D preferred stock vote equally with shares of common stock on an “as-if-converted” basis.
No dividends have been declared or paid on preferred stock or common stock since inception of the Company.
(b) Warrants
In conjunction with the issuance of Series A preferred stock, the Company issued for $1,700 in cash a warrant to purchase 1,700,000 shares of Series B preferred stock at an exercise price of $5.88 a share, expiring 10 years from the date of issuance. In July 1998, the warrant holder exercised a portion of the warrant to purchase 514,047 shares of Series B preferred stock. In August 2000, the warrant holder exercised the remainder of the warrant to purchase 1,185,953 shares of Series B preferred stock.
In connection with equipment financing in April 1999, the Company issued a warrant to purchase 10,000 shares of common stock at a price of $6.00 per share, exercisable at any time prior to April 2009. The fair value of the warrant was estimated using the Black-Scholes option-pricing model with the following assumptions: risk-free rate of 5%; contractual life of 10 years; no dividends; and 80% expected volatility. The proceeds assigned to the warrant were insignificant, and consequently, no debt discount was recorded. As of June 30, 2002, all of these warrants remained outstanding.
In conjunction with the issuance of an aggregate of $6,287,500 of convertible subordinated notes payable to National Semiconductor Corporation (National) in fiscal 2000, the Company issued warrants to purchase 168,683 shares of Series B preferred stock at $5.88 per share and warrants to purchase 95,368 shares of Series C preferred stock at $6.76 per share. These warrants are exercisable at any time prior to the end of their five year contractual life. The proceeds from the issuances of the convertible subordinated notes and warrants were assigned to the warrants and notes payable based on their relative fair values. The fair values of the warrants were estimated using the Black-Scholes option-pricing model with the following assumptions: risk-free interest rates ranging from 5.97% to 6.19%; contractual lives of five years; no dividends; and 80% expected volatility. Using these assumptions, the proceeds assigned to the warrants were $1,119,087 with a corresponding amount recorded as a debt discount to be amortized to interest expense on a straight-line basis over the term of the loan. As of June 30, 2002, all these warrants remained outstanding.
In August 2000, the convertible subordinated notes held by National were converted into shares of Series B and C preferred stock. At the time of conversion, the carrying value of the loans was reclassified to convertible preferred stock.
Restrictions on the exercise apply such that National can only exercise these warrants to the extent that the number of shares of Series B and C preferred stock to be obtained, when added to all other shares
F-38
FOVEON, INC.
(A Development Stage Enterprise)
Notes to Financial Statements – (Continued)
June 30, 2002 and 2001 and July 1, 2000
(All information as of and for the periods ended
June 30, 2002 and 2001 is unaudited)
of the Company’s common and preferred stock held by National, do not represent more than 47.5% of the outstanding voting stock of the Company on the date of exercise.
Notwithstanding the provisions above, National may exercise all of its outstanding warrants upon any reclassification of the capital stock of the Company, any consolidation, or merger of the Company in which the shareholders immediately prior to such merger or consolidation do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the surviving entity, or transfer all of the assets of the Company.
In conjunction with the issuance of an aggregate $2,712,500 of convertible subordinated notes payable to Synaptics Inc. (Synaptics) in fiscal 2000, the Company issued warrants to purchase 106,718 shares of Series B preferred stock at $5.88 per share and warrants to purchase 22,918 shares of Series C preferred stock at $6.76 per share. These warrants are exercisable at any time prior to end of their five year contractual life. The proceeds from the issuances of the convertible subordinated notes and warrants were assigned to the warrants and notes payable based on their relative fair values. The fair values of the warrants were estimated using the Black-Scholes option-pricing model with the following assumptions: risk-free interest rates ranging from 5.97% to 6.19%; contractual lives of five years; no dividends; and 80% expected volatility. Using these assumptions the proceeds assigned to the warrants were $534,830 with a corresponding amount recorded as a debt discount to be amortized to interest expense on a straight-line basis over the life of the loan. In August 2000, the convertible subordinated notes held by Synaptics were converted into shares of Series B and C preferred stock. At the time of conversion, the carrying value of the loans was reclassified to redeemable convertible preferred stock. As of June 30, 2002, all these warrants remained outstanding.
(7) 1997 Stock Plan
The Company adopted a stock plan in July 1997 (the 1997 Plan) that provides for the issuance of incentive and nonstatutory options to purchase shares of common stock and rights to purchase restricted common stock. As of June 30, 2002 and 2001, a cumulative total of 3,900,000 and 3,200,000 shares of common stock, respectively, had been reserved for issuance under the 1997 Plan. Nonstatutory stock options may be granted to employees and consultants and incentive stock options to employees. Options have a term no greater than 10 years and generally vest 25% at the end of the first year and at a rate of 1/48 per month thereafter.
Nonstatutory options are exercisable at a price not less than 85% of the fair value of the stock at the date of grant, as determined by the Company’s board of directors, unless they are granted to an individual who owns greater than 10% of the voting rights of all classes of stock, in which case the exercise price shall be no less than 110% of the fair value. Incentive stock options are exercisable at a price no less than 100% of fair value of the stock at the date of grant, as determined by the Company’s board of directors, except when they are granted to an employee who owns greater than 10% of the voting power of all classes of stock, in which case they are exercisable at a price not less than 110% of fair value.
Under the terms of the 1997 Plan, employees may be granted rights to purchase restricted common stock and exercise unvested options. The Company’s repurchase rights with respect to restricted common stock lapse in accordance with the option-vesting schedule described above. Upon termination of service, an employee’s or nonemployee’s unvested shares may be repurchased by the Company at the original purchase price. As of June 30, 2002 and 2001, 185,522 and 262,294 shares of outstanding restricted common stock, respectively, were subject to repurchase by the Company.
Under Accounting Principles Board (APB) Opinion No. 25, the Company has recorded no compensation costs related to its stock-based awards to employees for the period from July 9, 1997 (inception) to June 30, 2002, because the exercise price of each option equals or exceeds the fair value of the underlying common stock as of the grant date for each stock option. Had compensation cost for the Company’s employee stock
F-39
FOVEON, INC.
(A Development Stage Enterprise)
Notes to Financial Statements – (Continued)
June 30, 2002 and 2001 and July 1, 2000
(All information as of and for the periods ended
June 30, 2002 and 2001 is unaudited)
awards been determined consistent with the fair value approach prescribed in SFAS No. 123, the Company’s pro forma net loss for the years ended June 30, 2002 and 2001, and July 1, 2000 would have been $14,134,653, $13,632,038, and $13,819,462, respectively, and for the period from July 9, 1997 (inception) to June 30, 2002 would have been $54,309,775.
The fair values of employee stock options granted were estimated on the date of grant using the minimum value method. The following weighted average assumptions were used in this calculation: risk-free interest rate between 4.17% and 6.37%; expected life of 4.5 years; no dividends; and expected volatility of 0%.
The weighted average fair value of employee options granted for the years ended June 30, 2002 and 2001, and July 1, 2000 was $0.12, $0.14, and $0.10, respectively.
The following table summarizes information about stock options outstanding under the 1997 Plan as of June 30, 2002:
| Exercise prices |
Number outstanding |
Weighted average remaining contractual life (years) |
Number of shares vested |
| $0.10 | 313 | 5.83 | 313 |
| 0.50 | 594,169 | 7.34 | 375,958 |
| 0.70 – 0.80 | 1,093,994 | 9.21 | 160,523 |
| 1,688,476 | 8.55 | 536,794 |
The weighted average exercise price of shares vested as of June 30, 2002 was $0.56.
F-40
FOVEON, INC.
(A Development Stage Enterprise)
Notes to Financial Statements — (Continued)
June 30, 2002 and 2001 and July 1, 2000
(All information as of and for the periods ended
June 30, 2002 and 2001 is unaudited)
Option activity for the 1997 Plan is summarized as follows (unaudited except for the year ended July 1, 2000):
| Options/ shares available for grant |
Stock options outstanding |
Weighted average exercise/ purchase price |
|
| Balances as of July 9, 1997 | — | — | $ |
| Authorization of shares available for grant | 2,000,000 | — | — |
| Restricted stock issued | (920,000 ) | — | 0.10 |
| Balances as of July 3, 1998 | 1,080,000 | — | 0.10 |
| Restricted stock issued | (245,000 ) | — | 0.36 |
| Options granted | (440,500 ) | 440,500 | 0.50 |
| Options canceled | 20,000 | (20,000 ) | 0.10 |
| Options exercised | — | (6,250 ) | 0.10 |
| Balances as of July 2, 1999 | 414,500 | 414,250 | 0.47 |
| Increase in shares available for grant | 500,000 | — | — |
| Options granted | (651,500 ) | 651,500 | 0.50 |
| Options canceled | 136,626 | (136,626 ) | 0.49 |
| Options exercised | — | (30,624 ) | 0.32 |
| Balances as of July 1, 2000 | 399,626 | 898,500 | 0.48 |
| Increase in shares available for grant — |
700,000 | — | — |
| Restricted stock issued | (150,000 ) | — | 0.70 |
| Options granted | (521,250 ) | 521,250 | 0.70 |
| Options canceled | 74,263 | (74,263) | 0.51 |
| Options exercised | — | (78,529 ) | 0.50 |
| Balances as of June 30, 2001 | 502,639 | 1,266,958 | 0.58 |
| Increase in shares available for grant | 700,000 | — | — |
| Restricted stock issued | (40,000 ) | — | 0.70 |
| Options granted | (691,950 ) | 691,950 | 0.74 |
| Options canceled | 132,137 | (132,137 ) | 0.66 |
| Options exercised | — | (138,295 ) | 0.50 |
| Balances as of June 30, 2002 | 602,826 | 1,688,476 | 0.65 |
(8) Related Party Transactions
In fiscal 2002, 2001, and 2000, the Company purchased raw materials from National totaling $1,433,067, $1,667,909, and $880,631, respectively, to be used in manufacturing and research and development. In addition, the Company also leased an office facility from National and paid rent and a related security deposit in fiscal 2002, 2001, and 2000 of $-0-, $581,410, and $643,512, respectively.
As of June 30, 2002 and 2001, amounts payable to National (included in accounts payable) were $104,698 and $68,701, respectively. As of June 30, 2001, amounts due from National (included in other current assets) were $102,568.
F-41
FOVEON, INC.
(A Development Stage Enterprise)
Notes to Financial Statements — (Continued)
June 30, 2002 and 2001 and July 1, 2000
(All information as of and for the periods ended
June 30, 2002 and 2001 is unaudited)
(9) Income Taxes
Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34% to pretax loss as a result of the following:
| June 30, 2002 | Years ended June 30, 2001 |
July 1, 2000 | Period from July 9, 1997 (inception) to June 30, 2002 |
|
| Expected tax benefit at U.S. federal statutory rate of 34% | $(4,791,689 ) | (4,625,939 ) | (4,694,222 ) | (18,437,236 ) |
| Net operating loss and temporary differences for which no tax benefit was realized | 4,652,203 | 4,534,245 | 4,601,747 | 17,385,839 |
| Nondeductible expenses | 139,486 | 91,694 | 92,475 | 1,051,397 |
| Total tax expense | $ | — | — | — |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of June 30, 2002 and 2001 are presented below:
| 2002 | 2001 | |
| Deferred tax assets: | ||
| Research and other tax credit carryforwards | $1,603,000 | 1,080,000 |
| Start-up expenditures | 844,000 | 1,063,000 |
| Net operating loss carryforwards | 17,674,000 | 12,712,000 |
| Others | 583,000 | 611,000 |
| Gross deferred tax assets before valuation allowance | 20,704,000 | 15,466,000 |
| Less valuation allowance | 20,704,000 | 15,466,000 |
| Net deferred taxes | $ | — |
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Due to the uncertainty surrounding the Company’s ability to realize such deferred tax assets, a full valuation allowance has been established.
As of June 30, 2002, the Company has net operating loss carryforwards of approximately $46,403,000 and $32,512,000 for federal and California income tax purposes, respectively. The federal and California net operating loss carryforwards begin to expire in fiscal 2018 and 2006, respectively. As of June 30, 2002, the Company has research and experimental tax credit carryforwards for federal and California purposes of approximately $1,097,000 and $756,000, respectively. The federal research and experimental credit carryforwards expire in fiscal 2022. The California research and experimental credit can be carried forward indefinitely.
Federal and state tax laws impose significant restrictions on the utilization of net operating loss carryforwards in the event of a change in ownership of the Company which constitutes an “ownership change,” as defined by the Internal Revenue Code, Section 382. The Company has not determined whether such an “ownership change” has occurred which could limit the availability of the net operating losses and tax credits.
F-42
FOVEON, INC.
(A Development Stage Enterprise)
Notes to Financial Statements – (Continued)
June 30, 2002 and 2001 and July 1, 2000
(All information as of and for the periods ended
June 30, 2002 and 2001 is unaudited)
(10) Commitments
(a) Operating Leases
The Company leases its facilities and certain office equipment under operating leases. These leases expire at various dates through fiscal 2005. Future minimum lease payments under noncancelable operating leases as of June 30, 2002 are as follows:
| Fiscal year ending: | |
| 2003 | $ 508,948 |
| 2004 | 508,948 |
| 2005 | 381,711 |
| Total | $ 1,399,607 |
The Company’s rent expense was $417,274, $570,844, and $696,636 for the years ended June 30, 2002 and 2001, and July 1, 2000, respectively, and $2,233,953 for the period from July 9, 1997 (inception) to June 30, 2002.
(b) Capital Lease Obligations
The following is a schedule by fiscal year of future minimum lease payments under capital lease obligations for leased equipment and licensed software, together with the present value of the net minimum lease payments:
| Fiscal year ending: | |
| 2003 | $ 328,478 |
| 2004 | 328,478 |
| 2005 | 249,387 |
| 906,343 | |
| Less amounts representing interest | (84,100 ) |
| Present value of net minimum lease payments | 822,243 |
| Less current portion | 281,038 |
| Long-term portion of capital lease obligations | $ 541,205 |
Property and equipment under capital lease was $1,671,147 as of June 30, 2002, with accumulated amortization of $797,182.
(11) Employee Savings Plan
The Company sponsors a retirement savings and investment plan that is intended to qualify under Section 401(k) of the Internal Revenue Code (the 401(k) Plan) covering all of the Company’s employees. An employee may elect the Company to defer, in the form of contributions to the 401(k) Plan on his or her behalf, up to 12% of the total compensation that would otherwise be paid to the employee, not to exceed statutory limits. The Company does not match employee contributions to the 401(k) Plan.
(12) Subsequent Event
In August 2002, the Company issued an additional 214,466 shares of Series D preferred stock for net cash proceeds of $1,674,979.
F-43
SCHEDULE II
SYNAPTICS INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
Years Ending June 30, 2000, 2001, and 2002
| Balance at Beginning of Year |
Additions Charged to Income |
Deductions fom Reserve |
Balance at End of Year |
|
|---|---|---|---|---|
| Reserve deducted from assets— | ||||
| allowance for doubtful accounts: | ||||
| 2000 | $ 79,000 | $ 41,000 | $ — | $ 120,000 |
| 2001 | 120,000 | 5,000 | — | 125,000 |
| 2002 | 125,000 | 75,000 | — | 200,000 |
S-1